US/Markets: US Jobs Growth Weakens, Will Earnings Be Far Behind?

While the lower than expected jobs figures for March hit US market confidence, a more important influence will be the shape and health of the first quarter earnings reports that kicks off this week, starting tonight with Alcoa.

While Fed chairman Ben Bernanke's two speeches this week in the US (the first overnight) will attract a lot of attention, the earnings season has a growing number of investors, analysts and others worried.

Those worries are for the simple reason that many analysts think the surge in US earnings of the past 10 quarters is about to end as companies across the economy report weak or falling margins and profits (excluding the financials).

Last week saw the Standard & Poor's 500 index start the new quarter with a loss of 0.7%, the worst week since December and something of a contrast to the 12% first quarter gain.

The start here in Australia today will be weak as a result, despite the mixed inflation report from China yesterday.

US analysts are even more confused and some investors are starting to wonder if we are going to see a repeat of 2010 and 2011 when the economy and market started well, only to start slowing in the second quarter and then fall across the last six months of both years.

While the 120,000 new US jobs last month were below expectations for 200,000 or more new jobs for a fourth consecutive month, the detail showed some interest.

But compared to six months or so ago, the 1200,000 new jobs would have been good news: the solid figures from November to February simply raised expectations too high.

The improved rate of hiring is slowly pulling the unemployment rate down. It's fallen 1.8 percentage points since touching a 29-year high of 10% in late 2011.

Even with the latest increase in hiring, however, the private sector still employs 4.8 million fewer people than it did before the last recession started.

Economists cautioned that jobs gains in March were less than expected because of unseasonably warm winter weather which dragged forward the hiring of workers who would have been hired later in the year.

While the unemployment rate fell to 8.2%, the lowest level since January 2009, the fall came from people dropping out of the labour force.

That's usually a negative sign because it suggests jobs have become harder to find, but other data shows falling jobs benefit recipients falling and rising hiring intentions.

And they neglect the fact that the size of the US labour force had risen by almost a million people in the first two months of 2012, meaning a lot more people are actually now looking for work than were at the end of 2011. That is a positive sign.

And the other big encouragement was the fact that 37,000 new jobs were created in US manufacturing, for a total of half a million in the last two years, a sure sign of the rising level of activity in the economy.

But that in turn worried analysts ahead of the earnings season because they said the more than a million new jobs in the past 15 months will start crimping profit margins.

Much of the profit surge in the past two and a half years has come from a rise in productivity and static or falling labour costs.

That has now ended and some economists can see weak earnings outcomes for much of the next year as earnings growth 'reverts to the mean' (falls to around the long term average).

The spate of hiring since last fall has put more money in the hands of consumers, whose spending accounts for 70% of economic growth.

And that continued to show up in the consumer credit figures for February, released on Friday by the US Federal Reserve.

While not at the hectic pace of January, credit still rose a solid 4.2% in February.

January's 8.6% rise was revised higher to show 8.9% growth.

Revolving credit, such as credit card debt, fell by 3.3% in February, while non-revolving credit, like auto and student loans, jumped 7.7%.

According to Thomson Reuters, US S&P 500 companies' March quarter earnings are forecast to be up 3.2%, against 9.2% and almost 19% in the first quarter of 2011.

Analysts have been cutting estimates steadily in the last few months, but the ratio of cuts to increases steadied last month.

Most S&P 500 sectors are forecast to see earnings slow down, but materials and telecom companies stand out.

Of the 10 sectors in the S&P 500, six are expected to report on-year negative earnings growth, with telecommunications and materials among the worst performers.

Best sectors may include industrials, with on-year projected growth of 10%, followed by financials, consumer discretionary and consumer staples.

But some analysts maybe too gloomy.

Already 27 S&P 500 companies have reported results, with 82% beating analyst estimates by an average of 8.5%, a bit better than expected.

Thomson Reuters said that warnings have dominated the pre-earnings season.

Of the 121 pre-announcements, 68% are negative ones, compared with 58% in the first quarter a year ago.

And, if you strip out another gangbusters quarter for Apple (because of the launch of the new iPad), then earnings growth overall could be very weak.